Ohio Auditor releases county financial health tool

Ohio Auditor of State Dave Yost has released new tool to help cities and counties better assess their financial health and make informed budgetary decisions to avoid potential future fiscal stress.

“This effort has one goal: Help improve the financial health of our communities by providing a ‘fiscal physical’ to pinpoint potential problem areas,” Auditor Yost said. “Not every financial problem can be avoided, but this tool provides an early warning system to help identify those that can.”

Based on research, programming and testing, the Auditor’s office developed the new tool which generates “financial health indicators” (FHI) for all 247 cities and 88 counties in Ohio. The underlying data used to create the indicators comes from the annual financial statements cities and counties submit to the Auditor’s office. The initial release of information is based on data up through 2015.

Using data from a rolling four-year period, up to 17 financial indicators are generated for all counties and cities, each analyzing a significant piece of financial information. Depending on the data, each condition is designated as either having a “critical outlook,” “cautionary outlook” or “positive outlook.” The financial stress of a city or county is higher as the number of critical or cautionary indicators increases. The greater the number of indicators, the greater the risk.

Based on 2015 data, 16 cities and 1 county meet the historical threshold for having high fiscal stress. Another 13 cities and 2 counties are within one “cautionary” or “critical” indicator from meeting that high-stress threshold. In all, 82 percent of counties and 92 percent of cities have at least one “cautionary” or “critical” indicator.

Morrow County currently has three “cautionary” indicators.

In establishing the benchmarks for the financial indicators, audit staff researched cities and counties that had been in either fiscal caution, fiscal watch or fiscal emergency, studying their financial data in the years leading up to being declared in a state of high fiscal stress. Those data points and trends were used to determine how many “critical” or “cautionary” indicators were indicative of future financial stress.

Historical data indicates that entities with at least six “critical” indicators or a combination of eight “critical” and “cautionary” indicators have ended up in a state of high fiscal stress. (For cities and counties using a cash or modified cash basis of accounting, four critical indicators or a combination of six critical or cautionary indicators is the threshold.)

“Our local leaders have performed well in navigating the financial storms they’ve faced, as only 16 cities and one county currently meet the historical thresholds for having high fiscal stress,” Yost said. “This report suggests to me that the financial condition of our cities and counties isn’t as great as some believe, nor is it as bad as some others believe.”

Collectively, the FHI reveal concerning trends in our state. For instance, cities and counties appear to have not spent heavily on their capital assets and infrastructure in recent years, leaving local leaders to face tough decisions in the near future. Data also show declining year-end balances in general funds, indicating spending is outpacing revenues. In addition, many communities have experienced declines in property tax revenues, an important revenue stream for basic services.

The FHI reports will be generated twice a year for each entity: Once when the city or county submits its financial statements for a preliminary report, and a final time after any adjustments are made following the Auditor’s review. Full reports could not be created for cities and counties that have not filed financial statements or if they have changed the method of accounting they use during the past seven years.

The FHI are the outgrowth of a recognition the Auditor had early during his first term that some communities were in poor health financially and, barring some significant changes, were likely going to become sickly. “I began working with my staff to create a new financial tool that would help city and county officials understand their fiscal vulnerabilities and make prudent, well-informed decisions,” Yost said.

Auditor Yost believes it is important for entities, citizens and policymakers to understand how cities and counties compare with one another and for trends in the data to emerge. To make that comparison easy, reports for both cities and counties can be generated through the Financial Health Indicator webpage that lists all indicators side by side.

By their very nature, the work of auditors is retrospective: They analyze and scrutinize information and controls to protect the public’s interest. With the Financial Health Indicators, the Auditor of State’s office is providing a tool that is forward looking through the use of historical trends and current data.

“These indicators and the overall condition of a city or county should not be construed as a criticism of the operating decisions of local officials,” Yost explained. “Rather, these indicators illustrate the financial stress on our cities and counties.”

A handful of other states, including Washington, New York and Michigan, have similar programs and were used to help inform the Auditor’s team as the tool was developed during the past several years.